Virtual data rooms let you store and access lots of documents in the cloud--thousands and thousands of them: Think souped-up versions of Dropbox for the corporate user.
Your customers would do complex transactions in which huge amounts of information change hands (think financial deals and lawsuits). Those transactions are sensitive and complicated, so virtual data rooms let users determine who is allowed to see what, and many provide detailed tracking services. They replace the physical "document rooms" that many law firms and financial companies used to employ during deals.
Now that nearly everything has migrated to the Web, VDRs have followed, servicing just about any industry that needs to share information with third parties. Big new users of VDRs include companies in life sciences, such as pharmaceuticals, as well as government and health care. The spike in bankruptcies, caused by the Great Recession, has also increased use of VDRs by the many parties involved in unwinding or restructuring corporate liabilities.
Typcially, data rooms let users set different levels of control and determine who can see what in sensitive transactions, and they can track which parties view which documents.
The growth of VDRs is expected to continue at a strong pace as the shift to digital gets more entrenched and as consumers see the benefits of sharing data--consumers that have fueled Dropbox's growth to 50 million users.
"The space around sharing content externally is being pushed by the nature of our work today across organizations, and pushed by the cloud, which is the natural place where content can be shared," says Rob Koplowitz, vice president and principal analyst for Forrester Research, of Cambridge, Massachusetts.
The VDR market was $628 million in 2012, and it's growing fast as paper-intensive industries take to the cloud. The market is likely to grow to $1.2 trillion by 2017, according to research firm IBIS, of Santa Monica, California.
Much of your start-up costs will depend on what you bring to the table. If you come fully loaded with an IT team and your own software program that allows for cloud-based management of thousands of pages of documents, your start-up costs will be pretty minimal. Otherwise, it could cost hundreds of thousands of dollars or more. Costs include the most recent, state-of-the-art computers, servers, skilled IT workers, and programmers.
Margins are about 7.5 percent, according to IBIS. The majority of revenue is eaten up by the need for highly trained technology staff including programmers. You'll probably need to secure at least one big customer with repeat business before you become profitable.
RR Donnelley and Merrill Corp. are the big public companies in this space, and the longtime established players. Newer company Intralinks is also public. But there are at least several hundred smaller players. Two notable smaller players are ShareVault and Box. Box secured $81 million in venture funding in 2011.
Venture Capital's Role
Venture capital firms have flocked to companies such as Dropbox and Box with several hundred million dollar investments. So far, VC's haven't swarmed to the true, high-touch VDRs that service the most paper-intensive, security-bound legal and financial deals yet, but that's probably only a matter of time.
Your customers will include investment banks, law firms, government service providers, and any company wishing to share documents with outside parties, including those companies' customers and potential buyers.
Your supply chain downstream--meaning those who will be buying your services--will include investment banks, law firms, companies involved in mergers and acquisitions, and any other company looking to share information externally. People you'll be buying from upstream include software suppliers and publishers, Data processors and hosting sites, IT consultants, programmers, and any other third party support involved in keeping your services up and running.
Barriers and Obstacles
Big, entrenched competitors and a moderately high cost for starting up will be your biggest barriers to entry. The software needed to run data rooms is extremely sophisticated and you'll need an in-depth knowledge of programming. But if you have the right people and can find a new spin on the dominant technology, that'll give you an edge. VDR provider ShareVault, for example, which started business in 2006 with more standard products, now offers foreign translation services for documents.
You can also compete on price and by offering excellent service.
Paths for Growth
The whole concept behind virtual data rooms--sharing huge amounts of information--is one that plenty of big companies, such as Microsoft and IBM, are developing with plenty of resources, with enterprise products like Sharepoint and Connections respectively. Start-up Box is stealing share with its own enterprise solutions. Google also knows the technology is important and has been working on its own collaboration products, and so has Dropbox, which is developing the space for consumers.
So while it's intensely competitive, the market is also likely to be enormous, which means you can win business from other companies. Also look at new niches and think about developing a specialty in emerging categories like real estate or health care.
Experts to Consult
Virtual Data Rooms are a lightly regulated industry. If you are serving a public company you'll have to conform to their own audit requirements as defined by Sarbanes-Oxley.
You probably won't need to consult regulators to get started, but data rooms are highly susceptible to hackers, so make sure you talk to network security specialists and have the best network security available.
The Quick and Dirty on Virtual Data Rooms
There is big-ticket potential...
Companies doing a one-time transaction like an acquisition or bankruptcy won't offer much repeat business--that makes VDRs different from other software-as-a-service models. But the going rate is about 85 cents a page. That's big money for transactions that require thousands of pages of documents.
...But the big dogs know it
Watch out for Merrill and RR Donnelley. Some law firms have proprietary services.
Private equity and VC firms aree interested. They also happen to be big users of VDRs. Other potential investors are software providers and Web hosting companies.